This is certainly the worst news in recent months (apart from the sharp increase in France’s public deficit in 2023): in the month of April 2024 alone, consumer prices increased by 0.6 % both in France and in the euro zone as a whole. Over three months, this increase reached 1.8% in France and 2% for the Economic and Monetary Union (EMU). Finally, since January 2021, the surge in consumer prices (inflation) has reached 16.3% and 19.7% respectively.
Obviously, we remain very far from the price reduction promises made by both the French government and the European Central Bank (ECB) for several months and even more recently. The tragedy is that this new price tension is observed in almost all sectors and in particular food, manufactured goods and especially services, for which prices increased in the month of April alone by 0.8% in the euro zone and 1% in France.
In 2023, inflation slowed to 4.9% on average in France
Inflation is expected to rise further, thus weighing on household purchasing power and economic growth.
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Of course, after the explosion recorded in 2022-2023, overall inflation, that is to say the annual shift in consumer prices, remained relatively moderate at 2.4% by European standards, both in France and throughout the euro zone (2.2% according to INSEE standards). However, from May and especially from this summer, taking into account an unfavorable base effect, linked to the slightest increase in prices from May to July 2023, this should also start to rise again.
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And this, especially since the increase in raw material prices and the fall in the euro over the past few months have not yet had their effects on consumer prices. In this context, the purchasing power of households will further suffer, further weakening economic activity and employment, which will ultimately worsen public deficits, particularly in France. At the same time, continued high inflation across the euro zone will force the ECB to limit the monetary easing announced with great fanfare for next June. In the event of a rise in inflation in May (a very likely outlook), Madame Lagarde and her acolytes could even be forced to maintain the ECB’s refi rate at 4.5% during the monetary policy meeting on June 6, 2024.
Long-term rates are boosted by pressures on inflation and rising public deficits
As a logical consequence of this reflation and the caution imposed on the ECB, but also of the continued increase in public deficits, the interest rates on the bonds of Eurozone States should also continue to tighten, particularly in France, where the 3.5% mark for the 10-year OAT could be exceeded as early as June. On this subject, it must be emphasized that, according to the Ministry of Finance’s own figures, the French State deficit (therefore excluding local and social authorities) rose sharply again in March, reaching 171.32 billion euros over twelve months, or 3.5 billion more than a year ago and its second historic record after March 2021.
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The ECB could encourage imported inflation if it were to lower its rates before the Fed
In this context, contrary to what some want us to believe, after having already increased from 4.8% to 5.5% between 2022 and 2023, France’s public deficit/GDP ratio will further increase in 2024, approaching certainly the 6%. Obviously, the awakening risks being painful… Finally, if, despite the strong rise in consumer prices, the ECB lowers its key rates before the American Federal Reserve (Fed), which has also just warned on its growing concerns about the continuation of high inflation across the Atlantic, the euro/dollar will depreciate further, which will put an upward pressure on the prices of imported products and therefore on overall inflation…
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Faced with inflation, the French practice “deconsumption”
Beware of the specter of stagflation (economic stagnation and high inflation)
This will lead France and the euro zone into a new phase of stagflation (high inflation and economic stagnation), which will obviously not fail to fuel public deficits, and therefore public debt, causing new tensions in bond interest rates. of State, therefore less economic activity… In other words, as we have continued to point out for several months, it was not serious to bury inflationary risks too quickly, which are unfortunately particularly stubborn.
Marc Touati, economist, president of the ACDEFI firm, author of 8 economic best sellers, including RESET II – Welcome to the world after, released in September 2022.
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You can also find his video chronicles on his YouTube channel, which has more than 148,000 subscribers, including the latest: “Inflation, rating, deficits: are French savings in danger?”
